Unequal Treatment of Local Government Taxpayers in North America

Paul Daly June 6, 2012

The highest courts of both the United States and Canada have both recently pronounced on claims relating to the unfairness of local government taxation systems. Before the Supreme Court of Canada, the argument went to the substantive reasonableness of the municipal by-law at issue. Further south, the Supreme Court of the United States was asked to find a violation of the equal protection clause of the 14th Amendment to the U.S. Constitution. Doctrinally, the cases are distinct, but the striking similarity of the issues engaged and the results reached makes for an interesting comparison.

Catalyst Corporation operated a paper mill in the North Cowichan District of British Columbia, on Vancouver Island. It had the misfortune to be the major contributor to the municipal coffers. As new residents flocked to the area, property values soared. Concerned that taxing residences on the basis of their actual value would drive away these newcomers, the municipality decided instead to jack up the rates payable on industrial property. By the time the case made it to the Supreme Court, Catalyst was paying a rate more than 20 times the rate payable by owners of residential property. Worse still, Catalyst’s mill had its own infrastructure, so the corporation hardly benefited from the services provided out of municipal taxes.

In Catalyst Paper Corp. v. North Cowichan (District), 2012 SCC 2, Catalyst complained that the disproportionate burden it shouldered was unreasonable: the relevant municipal tax by-law did not meet the standards of justification, intelligibility and transparency set down by the Supreme Court in Dunsmuir. The Court agreed that judicial review was available even in respect of policy decisions taken by municipalities (a point which had surprisingly been left unclear since a 1983 decision) (para. 15). For their part, the parties agreed that the appropriate standard was reasonableness.

Catalyst urged that the qualities of justification, intelligibility and transparency were absent from the decision-making process. And the Court seemed to agree with this argument, as the following passage suggests:

[29]It is important to remember that requirements of process, like the range of reasonable outcomes, vary with the context and nature of the decision-making process at issue. Formal reasons may be required for decisions that involve quasi-judicial adjudication by a municipality. But that does not apply to the process of passing municipal bylaws. To demand that councillors who have just emerged from a heated debate on the merits of a bylaw get together to produce a coherent set of reasons is to misconceive the nature of the democratic process that prevails in the Council Chamber. The reasons for a municipal bylaw are traditionally deduced from the debate, deliberations and the statements of policy that give rise to the bylaw.

[30]Nor, contrary to Catalyst’s contention, is the municipality required to formally explain the basis of a bylaw. As discussed above, municipal councils have extensive latitude in what factors they may consider in passing a bylaw. They may consider objective factors directly relating to consumption of services. But they may also consider broader social, economic and political factors that are relevant to the electorate.

But the Court shifted the goalposts. Its response was that municipal by-laws should not be held to the same exacting standard as regular administrative decision-making. Municipal by-laws will only be struck down by a reviewing court where the by-law is so unreasonable that no reasonable municipality could have adopted it:

[24] [C]ourts reviewing bylaws for reasonableness must approach the task against the backdrop of the wide variety of factors that elected municipal councillors may legitimately consider in enacting bylaws. The applicable test is this: only if the bylaw is one no reasonable body informed by these factors could have taken will the bylaw be set aside. The fact that wide deference is owed to municipal councils does not mean that they have carte blanche.

Effectively, a reduced standard of review was applied. With this shift, the Court was able to uphold the by-law despite its disproportionate effect on Catalyst:

[34]This brings us to the content of the bylaw at issue. There can be no doubt that the impact of the bylaw on Catalyst is harsh. The ratio between major industrial rates and residential rates imposed is among the highest in British Columbia (only two municipalities exceed it) and far outside the pre-1983 norm. In Catalyst’s present economic situation, the consequences are serious — indeed, Catalyst suggests that the industrial rate threatens the continued operation of its mill in the District.

[35]However, countervailing considerations exist — considerations that the District Council was entitled to take into account. The Council was entitled to consider the impact on long-term fixed-income residents that a precipitous hike in residential property taxes might produce. The Council has decided to reject a dramatic increase and gradually work toward greater equalization of tax rates between Class 4 major industrial property owners and Class 1 residential property owners. Acknowledging that the rates from Class 4 are higher than they should be, the Council is working over a period of years toward the goal of more equitable sharing of the tax burden…The bylaw favours residential property owners, to be sure. But it is not unreasonably partial to them.

Sadly, the decision in Catalyst was itself the catalyst for Catalyst to enter restructuring.

The taxpayers in Armour v. Indianapolismet with a similarly sad outcome. Here, the City of Indianapolis had consistently funded sewerage improvements by apportioning costs across the properties benefitting from the improvement. Home owners had the option of paying a lump sum or in installments. Of the 180 home owners affected, 38 paid up front. Then, the City abandoned its previous system of apportionment. Those who elected to pay by installment saw their debts cancelled. The 38 honest citizens who coughed up the cash received no refund. Affronted, they brought suit, claiming that the City’s actions violated the equal protection clause of the 14th Amendment: different categories of taxpayer had been unfairly created.

In such cases, where no ‘suspect classification’ (such as race) is involved, the government actor need only demonstrate a rational basis for the classification. For the majority, led by Justice Breyer, the administrative burdens of undoing the overpayments amply justified the classification: “to continue…unpaid-debt collection could have proved complex and expensive” (op. at p. 8) and granting refunds “would have involved even greater administrative burden” (op. at p. 9). Ultimately, the view of the Indiana Supreme Court that the City’s classification was rationally related to its legitimate interests in reducing administrative costs, prevailed (op. at p. 10).

A spirited dissent was issued by Chief Justice Roberts (which Justices Alito and Scalia joined). Such a gross disparity in taxes could not be justified. Permitting government bodies to make ex ante classifications in the interests of administrative convenience is one thing. Permitting them to make ex post classifications after money has already been collected is quite another. All the more so given that state law expressly provided for equal treatment of home owners. Administrative costs cannot justify such disparate treatment: “The Equal Protection Clause does not provide that no State shall ‘deny to any person within its jurisdiction the equal protection of the laws, unless it’s too much of a bother’” (dissenting op. at p. 4). Given that refunding the payments would not be beyond the considerable wits of city officials, its concerns about administrative hassle should not be conclusive. In so arguing, the Chief Justice relied heavily on a previous decision in which the Court had struck down a property tax scheme in West Virginia on the basis of the gross disparities it produced.

There is much to commend the Chief Justice’s dissent. A disparity had been produced and the response of the City was manifestly unconvincing. Allowing government actors to justify behaviour that is prima facie unreasonable on the basis that “it would cost too much” to behave reasonably leads one to adopt an uninspiring position.

At least one thing is clear: we in North America are very much at the mercy of the municipalities who tax us.